Victory and Betrayal:
The Evergreen
Patent System

Pharmaceutical Company Tactics
to Extend Patent Protections

Brand-name drug companies sell more than $130 billion worth of pharmaceuticals
in the U.S. market every year.

The high revenue stream is due in part to new drugs to treat new ailments,
and an aging population that is living longer and taking more medications
than previous generations.

But the foundation of the brand-name companies' spectacular revenues
is the patent system. Once granted regulatory approval for a drug that
meets the test for patentability (novelty, usefulness and nonobviousness),
brand-name companies have exclusive rights to sell the product for the
remainder of the 20-year life of the patent on the drug. The monopoly
rights conferred by the patent enable the companies to charge far more
than the cost of production, and to earn huge returns on each sale.

When the drug goes off patent and generic competition commences, prices
plummet. The first generic competitor usually drops prices by 30 percent,
and full-fledged generic competition with five or six competitors typically
brings down the charge to the consumer by 70 to 80 percent.

Naturally, brand-name companies do everything they can to defer generic
competition. Critics, including the federal and state cops on the beat,
say the companies manipulate a complex legal and regulatory environment
to block generics from entering the market. They charge the companies
with using tactics including bogus patent claims, collusive settlements
with potential generic competitors, new patents on methods of formulating
drugs and special legislated patent extensions. The companies typically
deploy these tactics in a strategic campaign run in tandem with ever-more
elaborate marketing efforts, to ensure ongoing consumer reliance on expensive
brand-name products.

These practices are now coming under challenge, as rising prescription
drug costs spur new scrutiny of the pharmaceutical industry. Consumer
groups, states and employers who provide insurance are now all pursuing
lawsuits against the drug companies, alleging a host of improper and illegal
manipulations of the patent and regulatory system to protect pharmaceutical
company monopolies. The hope of the entities bringing these suits, as
well as the lawyers who are helping pay for them, is that -- following
the breakthroughs in the tobacco arena -- the cases will develop into the
next round of major class-action litigation.

Although the pharmaceutical industry has taken some major public relations
hits, it has not been isolated in the fashion of tobacco industry. It
is vigorously defending the lawsuits, denying the consumer interest claims
of patent abuse, affirmatively making the case for strong patent protection
-- and pressing for expanded monopoly rights.

Patently Invalid
The first steps in a concerted effort to defend and extend a drug patent
in the United States are to file for the patent, get regulatory approval
from the Food and Drug Administration (FDA) based on a showing that the
new product is safe and effective, and then to defend the patent against
all comers.

The granting of a patent is not an exact science. Patents in the United
States are routinely challenged; and as many as half of patents challenged
in court are invalidated.

In the case of pharmaceuticals, there is a vested interest -- the generic
pharmaceutical industry -- positioned to challenge bad patents.

Under the 1984 Hatch-Waxman amendments to the Food, Drug and Cosmetics
Act, generic manufacturers can get regulatory authority to market copies
of brand-name drugs by submitting an "Abbreviated New Drug Application"
(ANDA). While makers of new drugs must show their product is safe and
effective in a New Drug Application, ANDA applicants must only show that
the generic version is chemically equivalent to, and works the same as,
the brand-name product. This enables the generic manufacturers to avoid
duplicative, unnecessary and expensive testing that would deter many from
ever entering the market.

In filing an ANDA, the generic manufacturer must note the patent status
of the brand-name version of their product. If the generic maker hopes
to sell the drug during the term of the brand-name drug's patent, it must
certify that the patent is either invalid or will not be infringed by
the generic product. This is known as a "Paragraph IV Certification,"
and it triggers a right for the brand-name company to sue to enforce its
patent and prevent the generic from coming to market.

Litigation over a patent's validity is frequently complicated and drawn
out, and delays generic entry.

Critics say the brand-name companies often defend patents they know
to be invalid; and resort to paying generic makers to stay off the market.

Tamoxifen is a case in point. Tamoxifen, a drug to prevent re-occurrence
of certain kinds of breast cancer, is sold under the brand-name Nolvadex
by AstraZeneca.

In 1985, Barr Laboratories, a major generic manufacturer, submitted
an ANDA seeking FDA approval to market a generic version of tamoxifen.
In 1987, it amended the ANDA to include a Paragraph IV Certification.
Imperial Chemical, which held the patent, sued to enforce the patent.
In 1992, following a trial, a federal judge ruled the patent invalid.
Imperial appealed.

Then, in March 1993, Barr settled with Zeneca, a former subsidiary of
Imperial. In the settlement, the parties agreed to ask the appellate court
to vacate the decision holding the tamoxifen patent invalid. Zeneca agreed
to issue a license to Barr to sell tamoxifen, and to supply Barr with
the product. So long as the patent is not invalidated, other parties cannot
enter the market.

The result, according to a coalition of consumer groups organized by
the Prescription Access Litigation project, was a pricing duopoly. They
summarize in their complaint against Barr and AstraZeneca: "As the seller
of the only generic version of tamoxifen available, Barr is able to capture
approximately 80 percent of the market by pricing the drug slightly below
the price Zeneca charges for Nolvadex. Zeneca is able to maintain 100
percent of the market for tamoxifen because it sells the brand name, Nolvadex,
itself, and the generic version to Barr. Zeneca's tamoxifen -- labeled
as either Nolvadex or the generic sold by Barr -- is the only tamoxifen
available."

The Federal Trade Commission alleges a similar fact pattern in the case
of Schering-Plough's K-Dur 20, a potassium chloride supplement used to
treat patients who suffer from insufficient potassium, a condition which
can contribute to heart disease.

Potassium chloride is not patentable. Schering, however, was able to
obtain a patent -- which runs until 2006 -- on the coating for its potassium
chloride tablets. The coating enables controlled release of the drug over
time.

A generic firm, Upshur-Smith, filed an ANDA with a Paragraph IV Certification
in December 1995. On the eve of trial, in June 1997, the parties entered
into a settlement. Upshur-Smith agreed to drop its patent claim. Schering
agreed to pay the generic maker $60 million. Upshur-Smith agreed not to
compete with K-Dur 20 until September 2001, after which Schering would
license the product to Upshur-Smith -- avoiding a lawsuit which might have
invalidated the patent and opened the market to other generic competitors.
As part of the overall arrangement, Upshur-Smith agreed to license several
products to Schering.

A year later, Schering entered into a similar arrangement with another
generic maker, ESI. ESI agreed to stay off the market until 2004.

The effect of these agreements, the FTC alleged in an antitrust case
filed against Schering and the generics, was to "restrain competition
unreasonably and to injure competition by preventing or discouraging entry
of generic K-Dur 20 products."

Schering says the FTC has the story wrong. There was no collusion, it
says. It reached a reasonable settlement with Upshur-Smith, paying $60
million for the products in development for which it obtained rights,
and agreeing to settle the patent litigation with Upshur by splitting
the remaining patent period (giving Schering an additional five years
of exclusivity, and enabling Upshur to enter the market five years before
expiration of the patent). ESI's suit, Schering contends, had little chance
of success; it settled with the company only under pressure from a judge.

While Schering says it "categorically denies that it agreed to make
any Žunconditional' payments of $60 million" to Upshur, the FTC argues
in legal filings that the settlement agreement "explicitly states that
the $60 million payment was in consideration for Upshur's agreement to
stay off the market until September 1, 2001." Litigation in the case is
ongoing.

The 30-month Delay
A strange feature of the Hatch-Waxman is the connection it establishes
between patent disputes and issuance of regulatory approval for marketing
of generic drugs.

Once a brand-name drug receives marketing approval from the FDA, it
is listed in a publication called Approved Drug Products with Therapeutic
Equivalence Evaluations, commonly called the "Orange Book." The brand-name
maker is supposed to list any new patent that claims the drug or methods
of its use. If a generic manufacturer files a Paragraph IV Certification
and the brand-name maker elects to challenge the certification on the
grounds that a patent in the Orange Book covers the generics product,
an automatic 30-month exclusivity extension period kicks in. For two-and-a-half
years, the brand-name manufacturer is able to maintain its monopoly position.

(An alternative would be to grant regulatory approval to any qualified
generic, and let patent disputes be resolved in the courts. Generics that
proceeded to market during ongoing litigation would risk a court order,
in the event a patent was upheld, that they cease production and pay lost
profits to the patent holder.)

The existing arrangement obviously creates incentives for legal mischief,
and a wide array of lawsuits allege that it has been wrongly used by brand-name
makers.

In a June 2002 lawsuit against Bristol-Myers Squibb (BMS), the attorneys
general of 29 states and Puerto Rico, the Virgin Islands and the District
of Columbia allege that the drug maker fraudulently listed patents for
paclitaxel in the Orange Book to the detriment of consumers. BMS sells
paclitaxel under the brand-name Taxol. It is used to treat ovarian cancer.

Because information on the drug -- which was developed by the National
Cancer Institute -- was placed in the public domain early on, paclitaxel
is not patentable. Because the drug is a new chemical entity, BMS was
able to get a five-year exclusive marketing period beginning in December
1997 for paclitaxel under FDA rules.

BMS then proceeded to obtain two patents for methods of administering
paclitaxel as an antitumor agent (these related to dosage levels over
a prescribed time period). The state attorneys general allege that BMS
obtained these patents by "(a) knowingly and willfully making numerous
fraudulent omissions and misrepresentations to the PTO [Patent and Trademark
Office]; (b) with clear intent to deceive the patent examiner; and (c)
which material representations and omissions were the efficient, inducing
and proximate cause of the issuance" of the invalid patents. The attorneys
general list a series of documents that BMS allegedly withheld from the
patent examiner. These documents, published long before the patent application,
if known to the patent examiner, would have prevented issuance of the
patents, according to the attorneys general.

Simply by listing these patents in the Orange Book, BMS received an
additional 30 months marketing exclusivity, as it challenged a host of
generic makers seeking to enter the market for paclitaxel in 1997. Eventually,
the BMS patents were ruled invalid, except for specific parts which would
not by themselves block generic entry.

In 2000, according to the attorneys general, BMS started the process
over. In August, a drug company called ABI received a patent on certain
dosage forms of paclitaxel. The attorneys general allege the patent was
based on old information in the public domain, and that BMS knew the patent
was invalid. Ten days after the patent was granted, ABI sued BMS. BMS
and ABI "settled" their fabricated "dispute," according to the attorneys
general, and then Bristol listed the patent in the Orange Book. Through
a series of legal fits and starts, courts ordered BMS to delist the ABI
patent from the Orange Book, but it then had it relisted based on subsequent
BMS-ABI litigation. BMS did not withdraw its listing of the ABI patent
until January 2002, following a court ruling that all claims based on
the ABI patent against the generics were invalid.

"Before August 11, 2000," the attorneys general allege, "Bristol knew
that the [ABI] patent was invalid and that any claims that taxol or generic
taxol infringed the [ABI] patent would be baseless. Bristol was also aware
that its listing of the [ABI] patent in the Orange Book would confront
any manufacturer submitting an ANDA for generic taxol with further procedural
delay and costs as well as the prospect of an infringement action."

Alleging violations of federal and state antitrust and consumer protection
statutes, the attorneys general conclude that BMS's manipulation of the
linkage between patents and regulatory rules enabled the company to delay
generic competition in the paclitaxel market for more than three years.

Bristol-Myers Squibb CEO Peter Dolan responded to the attorneys general
lawsuit in a letter to employees.

"Regarding the action by the state attorneys general," Dolan wrote,
"the company has responded to their allegations by pointing out that the
matter has been in litigation for some time and continues to be, and asserting
that we will continue to make our case in the appropriate forums. Beyond
that, we are limited in what we can say about both the merits of our case
and the course of action we intend to pursue."

In his letter, Dolan also combatively responded to claims that, with
paclitaxel, BMS has profiteered on an invention given to it by the federal
government [see "The Great Taxol Giveaway," Multinational Monitor, May
1992].

"Whatever the course of this particular dispute," he wrote, "I urge
you to keep this in mind always: not one life has been extended by incendiary
and irresponsible commentary; not one new medicine has emerged from posturing
and grandstanding; not one scientific advance has come about from the
chatter of talk shows and message boards. New cures and scientific advances
come only one way: from hard work and dedication by highly skilled, principled
and talented people who are motivated by a vision of a healthier and better
world that they are working toward every day."

Child Testing: The 6-month Delay
The patent extension game is not limited to the courts and the halls of
the FDA. It also gets played out in Congress, where the pharmaceutical
industry is among the strongest of lobbies.

Last year, the industry successfully rammed through Congress a reauthorization
of "pediatric exclusivity" -- a provision that extends drug patents for
six months.

Under the pediatric exclusivity rule, drug companies receive an extra
six months patent protection if they test their product on kids.

Everyone agrees that testing in children is important, since children
respond differently to medications than adults, and a drug safe for adults
may be unsafe for children. Advocates for the pediatric exclusivity provision
-- which was enacted in 1997 and authorized to continue through 2001 to
give Congress an opportunity to review its record -- say the program has
been a great success.

The provision "has been highly successful and should be renewed," states
PhRMA's industry profile. "The new law is working just as intended: it
is producing a significant amount of new knowledge about the safety and
effectiveness of drugs commonly used to treat children. In just over three
years, nearly 60 pediatric studies were performed under the new law."

However, critics say too high a price has been paid to induce the child
testing. The average cost of child testing is around $4 million, according
to a Tufts study. The FDA has requested child tests on 188 drugs (costing
industry, in total, less than $800 million). The FDA estimates the pediatric
patent extensions are worth 40 times that -- just under $30 billion -- in
added sales for brand-name drug companies.

Led by Public Citizen, consumer groups say the pediatric exclusivity
has conferred a windfall on the drug companies. Public Citizen estimates
AstraZeneca will earn more than $1.4 billion in added revenue for Prilosec,
thanks to the pediatric exclusivity provision, with Pfizer also crossing
the $1 billion threshold for Lipitor. Drugs such as Prozac, Celebrex,
Zoloft, Claritin and Cipro will bring their makers more than $300 million
in added revenue, due to the provision.

Led by Republicans and some friendly Democrats, Members of the House
of Representatives defeated in committee various amendments that would
have capped these huge windfalls. These included proposals to guarantee
drug companies a 100 percent return on pediatric test costs, limiting
drug companies to a 10,000 percent return on certain drugs, and limiting
the incentive for the best-selling drugs (for which the 6-month extension
is worth the most).

The appropriate policy, say many public health advocates, would simply
be to provide the FDA with authority to require companies to test drugs
in children. "If the FDA had the authority to require testing, except
under limited circumstances, there would be no need to offer a handout
to America's most profitable industry to do what they should already be
doing -- testing to make sure its products are safe for everyone who will
use them," wrote Drs. Marcia Angell and Arnold Relman, both past editors
of the New England Journal of Medicine, in an October 2001 letter. "Imagine
the scandal if drug companies were to refuse to do the testing necessary
to assure that their drugs are safe for women to use without additional
patent life."

From Patent to Patent

The tactics of patent extension are deployed as part of an integrated
approach by the brand-name companies that critics call "evergreening"
-- meaning the patents never fall off the branches.

But even when the patent cycle finally runs out, the drug companies
frequently have a strategic plan to keep patients reliant on their patented
goods.

Consider the case of AstraZeneca's Prilosec, the heavily advertised
"purple pill" that treats heartburn. Its patent expired in April 2001,
but by employing an array of exclusivity-extending tactics, the company
has been able to keep generic competitors off the market.

Conscious that generics cannot be held at bay forever, AstraZeneca is
now spending hundreds of millions of dollars to promote its successor
to Prilosec, Nexium. "Today's purple pill is Nexium. From the makers of
Prilosec," say the new drug's ads.

Nexium is a slight chemical variant of Prilosec. As the Wall Street
Journal's Gardiner Harris reports, AstraZeneca studies show the new drug
to have only the slightest improved performance from Prilosec, not for
heartburn, but for "erosive esophagitis," where burped-up stomach acid
injures the esophagus. That slightly improved result enabled the company
to launch a full-court press to get consumers to switch from the drug
going off patent to the one just coming on.

On the market for little more than a year, Nexium had a 19 percent market
share of new heartburn prescriptions in April 2002. Prilosec's market
share had dropped to 25 percent, from 49 percent in 2000.

In another case involving one of the most heavily advertised drugs,
Schering-Plough is attempting a very similar strategy with its allergy
medicine Claritin. Having long sought to extend Claritin's patent protection
through specifically legislated extensions, a variety of formulation patents
and aggressive litigation, the company came under increasing pressure
as insurers and others petitioned to move the product to over-the-counter
status (where prices are generally much lower). In March 2002, Schering-Plough
agreed, though it says it still intends to defend its formulation patents
on Claritin.

The company was also ready with a back-up plan. It is now heavily pushing
its new patented prescription product, Clarinex, a related product which
received marketing approval in December 2001.

Restraints
The high price of medicines is now a hot topic in Washington, state capitols,
and in corporate boardrooms, where employers are increasingly frustrated
with the pharmaceutical-related costs of their health insurance premiums.

Many states are beginning to look at bulk purchasing arrangements, so
that they can negotiate the cost of drugs they buy through Medicaid and
other programs. By aggregating consumer power, bulk purchasing can significantly
lower prices -- though only by so much, so long as the drug companies maintain
monopoly control of the product.

Going more to the patent abuse issue, a rash of lawsuits have been filed
against the drug makers by the Federal Trade Commission, the state attorneys
general, and consumer coalitions including the Prescription Access Litigation
Project and the SPAN (Stop Patient Abuse Now) Coalition.

Some consumer groups are optimistic about the prospect of these lawsuits
to restrain abusive practices. If they can disgorge allegedly improper
revenues collected by a drug company in even a single instance, they may
send a powerful message to the industry. And as in the case of tobacco
and other litigation, effective discovery (the lawsuit phase when litigants
can demand documents from the other side) may change the political climate,
if damning internal industry documents are made public.

The industry will defend these lawsuits vigorously, however, and continue
to claim that it is merely enforcing legitimate patent rights and the
protections afforded it under the current regulatory system. No one should
doubt the industry's ability to defend itself effectively in court.

Another approach would be to change the regulatory rules, to end what
many believe are abusive practices. Senators Charles Schumer, D-New York,
and John McCain, R-Arizona, along with Representatives Sherrod Brown,
D-Ohio, and Jo Ann Emerson, R-Missouri, have introduced legislation to
reform the Hatch-Waxman amendments, to stop much of the protracted litigation
that delays the entrance of generics.

The bill, known as the Greater Access to Affordable Pharmaceuticals
(GAAP) Act (S. 812 in the Senate and H.R. 1862 in the House), would:

Eliminate the automatic 30-month stay granted by the FDA to brand-name
drug makers who file suit against a generic manufacturer's patent. Instead,
brand name manufactures would seek a preliminary injunction from the
courts. Brand-name manufacturers would be required to list all of a
drug's relevant patents with the FDA, and to certify that th e list
is complete.

Enable generic drug makers to seek a declaratory judgment on any
patent listed in the Orange Book.

Require petition filers to certify that their petitions are factually
based, warranted by existing laws or regulations, and not submitted
for any anti-competitive purposes, such as to cause unnecessary delay.
Any petitions believed to be used for anti-competitive purposes would
be investigated by the FTC, and any company making false statements
would be subject to existing criminal penalties.

"Lawyers have been able to pick Hatch-Waxman clean because our patent
laws give them the carte blanche to file frivolous patent challenges that
stop a generic's approval in its tracks," says Schumer. "With GAAP, if
brand-name manufactures want to block generic alternatives, their lawyers
will have to make their case to a judge."

The industry opposes the bill. "The bill incorporates the generic industry's
long-standing Žwish list' of legislative changes that are based on the
generic industry's mischaracterization of how the current system successfully
works," says Jackie Cottrell, PhRMA spokesperson. "Simply put, the Schumer-McCain
bill undermines a system of research incentives that has brought more
than 370 new medicines to waiting patients in the last decade."

The bill's supporters are hoping the legislation may gain support from
employers, and thus offset the powerful interests of the pharmaceutical
companies.

But with industry opposition high, passage in the near term seems unlikely.

Even as Schumer and McCain are seeking to address the problem of unmerited
patent extensions, other Members of Congress are floating ideas to extend
patent protections.

Apparently impressed with the pediatric exclusivity model, Senator Joseph
Lieberman, D-Connecticut, will propose a bill to provide incentives for
drug companies to perform R&D on products that may be useful to combat
bioterrorism. Under the bill, companies that undertook the R&D would be
entitled to a "patent bonus" that would allow them to extend patents of
their choice on other products.

A spokesperson for the Pharmaceutical Research and Manufacturers Association
told Reuters that this proposal is "constructive and encouraging."